Standing Committee A

[Mr. Joe Bentonin the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Clause 32

Meaning of “film production company”

Amendment proposed [18 May]: No. 47, in page 29, line 14 [Vol I], at the end insert the words
‘; but notwithstanding the provisions of this section, a company is only a "film production company" if it meets the conditionsfor film tax relief as set out in section 38 of this Act.’.—[Mrs. Villiers.]

Question again proposed, That the amendmentbe made.

Joe Benton: I remind the Committee that with this we are discussing the following: Amendment No. 64, in page 29, line 17 [Vol I], leave out lines 17 to 20 and insert—
‘(a) undertakes (whether on its own account or whether it is responsible to a third party)—
(i) principal photography and post production of the film, and
(ii) delivery of the completed film,'.
Amendment No. 31, in page 29, line 18 [Vol I], leave out ‘pre-production'.
Amendment No. 65, in page 29, line 22 [Vol I], leave out ‘pre-production,'.
Amendment No. 32, in page 29 [Vol I], leave out lines 24 and 25.
Amendment No. 33, in page 29, line 26 [Vol I], at end insert—
‘(3A) The Treasury may, by regulations—
(a) amend subsection (3); and
(b) provide that specified activities are or are not to be regarded for the purposes of this Chapter as film making activities;
and in this subsection “specified” means specified in the regulations.'.
Amendment No. 46, in page 29, line 27 [Vol I], after ‘company', insert
‘resident in the United Kingdom (and not resident in another place in accordance with the law of that place relating to taxation)'.
Amendment No. 34, in clause 34, page 30, line 19 [Vol I], after ‘on', insert ‘development,'.
Government amendment No. 26
Amendment No. 35, in clause 35, page 30, line 37 [Vol I], at end insert—
‘But for the purposes of this subsection—
(a) services provided in relation to rented equipment shall be considered to have been performed in the United Kingdom where the equipment is used in the United Kingdom; and
(b) where goods are initially supplied in the United Kingdom, their subsequent transport and use outside the United Kingdom shall not prevent the relevant expenditure from being treated as UK expenditure.'.

Edward Balls: We have made progress—although not very much, I see from the amendment paper—and our debate has been useful and wide-ranging. When we adjourned, I had addressed amendment No. 31 and was part way through addressing amendment No. 32. As I had explained to the Committee, I was taking the amendments in a slightly different order, so as to make my speech appear logical, as far as was possible.
I should like to make a couple of comments, following on from our wide-ranging debate. We had such a long debate on the nature and definition of a film production company and issues around that, because that goes to the heart of the issues explaining the decision to move away from the old tax treatment of films to the new tax treatment set out in the clauses.
The majority of the debate on Tuesday was about the definition of a film production company. Some Opposition Members, including the hon. Member for Chipping Barnet (Mrs. Villiers), felt that the criteria that we were setting out in the definition of “film production company” were both too broad and too tight, and would exclude some genuine film production companies that might not cover all aspects of all three stages of the processes defined in clause 32.
As I explained on Tuesday, the definitions in the clause are designed to ensure that the Government’s relief is properly targeted on genuine film-makers—those who really make films—so the definition requires the company to be responsible for all phases of film production, not just some. However, as I explained on Tuesday, it does not require the company to be directly responsible for all parts of all phases; nor does it prevent the company from sub-contracting some of the work to others.
We fully recognise that the stages to which the legislation refers—development, pre-production, principal photography and post-production—are, in practice, not sequential, and that there will be overlap between them; and we accept that a company may take over some pre-production work for which it will not have been fully, directly responsible. We also fully understand from our discussions with the industry that the film production company achieves much of what it wants through others, and that sub-contracting is absolutely standard practice. However, to qualify for the tax relief, the film production company needs to be the film-maker—the person who has the vision for the film and who is charged with taking that vision through to delivery. That is why they must be in control of each of the three stages.
During Tuesday’s debate, worries were expressed about the requirements being too tight. Now that I have explained that there is no expectation that the company will do all the work itself, or be responsible for all of every stage, I hope that the hon. Lady will be more comfortable with the clause. There was also concern that by using standard industry terms, such as development, pre-production and so on, without explicitly defining them, we are laying ourselves open to being misled and to allowing the new relief to be abused in the same way as what it replaces. However, as I explained on Tuesday, it must be right to use terms that the industry uses and understands, in order to ensure that it can operate the relief in reality. So if, for instance, developments in the industry mean that new things need to be done during pre-production, they are automatically included.
The hon. Member for Braintree (Mr. Newmark), who is not currently with us but who was certainly here on Tuesday, asked a good question about how we intend to prevent the deliberate manipulation of the divide between development and pre-production. He feared that a less scrupulous film-maker might disguise what were clearly development costs as pre-production costs. Although Treasury Ministers are responsible for the making of tax policy, the administration of the system is the responsibility of Her Majesty’s Revenue and Customs. It will be responsible for ensuring compliance with the new tax rules, and for the proper interpretation of “core expenditure”, just as it ensures compliance with the rest of the tax system. As we shall discuss later, if all else fails, the remedy lies in paragraph 3 of schedule 5, which gives the Treasury the power to specify what is included or excluded in respect of expenditure qualifying for the enhancement. Any attempt to disguise expenditure as something that it was not would allow film production companies to claim tax relief to which they were not entitled. The power in the paragraph deals with that issue.
On Tuesday, Committee members suggested that the rule that a company working in partnership cannot be a film production company would in practice exclude all co-productions, as they are by definition companies in partnership. That is absolutely not the case. From our extensive discussions with the film industry, we know that although it is standard practice for film makers to work collaboratively with others on international co-productions, they are not “in partnership” in the sense intended by clause 32(2). Separate film production companies are set up in every co-producing country, each being responsible for delivering its own contribution to the film as a whole, and each company can claim whatever tax relief is available from its respective Government.
Far from excluding companies that make films in that way, clause 32(4) makes special provision to ensure that co-productions can access the new tax relief in the same way as others. The rules in subsections (2) and (3) are designed to exclude partnerships of companies in which one partner’s only contribution to the film is to provide finance. Such an exclusion is essential to ensure that profitable companies not otherwise engaged in the film business are not able to badge themselves as full making partners and open the door to precisely the kind of abuses and avoidance to which the film tax relief regime has been subject in the past, and which the reforms and clauses are designed to prevent.

Rob Marris: Will my hon. Friend clarify whether he is talking about “partnership” in its everyday sense, using standard industry terms, or whether in the Bill the word is intended to be used in a legal sense, such as that used in the Partnership Act 1896 or whatever?

Edward Balls: I hoped that I had made that clear already. It is common practice for there to be co-productions and for film makers to work in “partnership” in its colloquial sense. As for the legal use of the term applied for tax purposes, partnerships in that sense will not qualify for the enhanced relief. To qualify, a company must be a film production company as defined in clause 32. I am grateful to my hon. Friend for allowing me to make that absolutely clear, as I hope it now is.
Having spent a few minutes bringing you up to date and clarifying a few of the points debated on Tuesday, Mr. Benton, I shall deal with some of the outstanding points made by the hon. Lady and others on Tuesday.
The hon. Lady suggested that the approach to defining UK expenditure in clause 35 was in some way determined by the European Commission. There was absolutely no truth in her statement. On the contrary, the definition of UK expenditure reflects our policy aim of encouraging producers to make full use of film-making skills, facilities and infrastructure in the UK.
It is true that, as is required, we have been discussing with the Commission the securing of state aids approval for the new relief, but the Commission has not indicated any concerns about how we define UK expenditure, nor requested that we change the definition in any way. We have, for example, reduced the qualifying limit from 40 per cent. to 25 per cent., and we made that decision on the basis of the points put to us during the consultation. In our view, the definition is well within the ambit and requirements of the state aids rules. We are confident that those discussions will proceed apace.
The hon. Lady also referred to a recent British film, which she suggested would have difficulty qualifying for the new relief because it was filmed largely outside the UK. I cannot comment on any individual film, at least in so far as it might or might not benefit from tax reliefs in future. On Tuesday, comments were made on films that we had and had not seen and enjoyed, but I shall not refer back to those discussions; at times, they became a little lurid.
I cannot comment on any individual film, nor speculate on whether it might have taken advantage of tax relief in the past. However, productions for which filming has taken place predominantly or wholly overseas will be entitled to a level of benefit lower than that of productions filmed in the UK. That is entirely in line with the Government’s policy aim, set out clearly in the legislation, of encouraging film makers to make full use of facilities and infrastructure in the UK. This is an enhanced tax relief for making British films in Britain, so it is not our intention to support overseas film industries.

Julia Goldsworthy: I understand from our discussions on the reliefs that the intention is not to foster British talent—to get British film makers to bring things to the starting line—but to help those production companies once there has been a green light, everything is ready to go and all that process has been secured; to make an Olympic analogy, it is not to help with the training to get people to the starting line but to ensure that they have the kit once they get to the start of the race.
Does the Minister think that the post-production skills for which the UK is well known often mean that companies are in a subsidiary partnership? Therefore, according to subsection (5) they might not benefit from the relief because they might not be the company that is “most directly engaged” in the activities referred to in the rest of the clause.

Edward Balls: We discussed the development phase on Tuesday. The Government do a number of things to support it, not least the different ways in which the Department for Culture, Media and Sport supports the fostering of new talent and supports new scriptwriters. That is done in a range of ways through public spending.
We are discussing the application of enhanced tax relief, which is for the production of British films. In our view, the production starts from the green light, pre-production phase. We discussed that at length on Tuesday and I hope that the situation is clear. It is not a tax relief that excludes from benefit films that have a part of that activity occurring overseas or collaborators from abroad. An important part of what we are doing is making Britain an even more attractive place for Hollywood film producers to make their films in. This is about making films in Britain, which I also wished to clarify in response to the amendment tabled by the hon. Member for Chipping Barnet.
Having addressed amendment No. 31 the other day, I turn to the specific remaining amendments tabled in advance of the Committee. Amendment No. 32 seeks to weaken the definition of “film production company” by removing the requirement that such a company must be involved in negotiating, contracting and paying for the various rights, goods and services that together make up the expenditure on making a film. For the reasons that we discussed on Tuesday and again today, I hope it is now clear that any company that is not involved in negotiating, contracting and paying for the fundamental elements of a film is not a film maker—a film production company—for the purposes of the tax relief.
I stress that this part of the definition does not include the word “all”. There is no requirement that the film production company must be responsible for all negotiating, contracting and paying in relation to a film. That would not reflect film-making practice. It is common for certain elements of a production to be delegated or contracted out to a third party, but the intention is now clear to the Committee. I urge hon. Members not to press the amendment to a Division.
Amendment No. 65 also seeks to remove the requirement that a film production company must be actively engaged in production, planning and decision making during pre-production. For the reasons I set out today and on Tuesday, I again urge the Committee not to press the amendment to a Division.
Amendment No. 64 goes even further than the other amendments proposed by the Opposition. It seeks to remove entirely the requirement that a film production company must have any responsibility for pre-production, principal photography and post-production of the film. Instead, it proposes that a film production company should be required to undertake only principal photography, post-production and delivery of the film, including where it undertakes such activities on behalf of a third party.
As I said this morning, a company that does nothave overall direct responsibility for all stages of making of a film is not the type of company at which the Government want to target the relief. A host of specialist subcontractors exist in the film world, and undertake various activities, but we are not targeting the relief at them either; we are aiming it at the person who is making the film and the bringing together of all those activities in the film production company. Again, I urge the Committee not to press the amendment toa Division.
Amendment No. 34 deals with a slightly separatebut not unrelated issue: the types of production expenditure that form the basis for calculating the film tax relief. It would include expenditure incurred on film development under the definition of core production expenditure. We discussed that at length when I explained where we have drawn the line. The Government support young talent being brought on in the pre-pre-production phase, the development phase. However, that is not the target of the tax relief. I urge members of the Committee to reject the amendment.
Amendment No. 47 goes completely against the intention of chapter 3. It would exclude from the basic tax treatment a film that does not qualify for enhanced tax relief. It would do so by imposing a requirement that a film production company must be making a film that satisfies the conditions of clause 38—that the film is British, is intended to be shown in a cinema and has spent at least 25 per cent. of its total budget in the United Kingdom. Such conditions can be met with certainty only on completion, and the new relief includes the mechanism to allow provisional claims while a film is being made. However, the new relief does not provide—as it would under the amendment—that should one of the conditions not be met, a different set of tax rules will apply.
We discussed such matters on Tuesday when debating the preamble to chapter 3, and clause 31. I made it clear that it is vital that we replace and update the old legislation under section 40A to D of the Finance (No. 2) Act 1992, which set out the way in which taxable profits of all film companies were previously calculated, whether or not they met the greater stringency of the tests to qualify for the enhanced tax relief. Those sections of the 1992 Act are outdated. They are cast in terms that were appropriate to, and fitted in with, the language of the old reliefs. We want a single modern system that creates a level playing field for the industry. To have two different systems running side by side, especially when there will always be a level of uncertainty about whether a film will qualify for the full relief until the process has been completed, would be cumbersome and overly bureaucratic. It would make it difficult for film makers to operate. We therefore prefer not to create a muddle caused by two different systems. We urge the Opposition to reflect further on the amendment and withdraw it.
Amendment No. 35 would amend clause 35, which sets out the meaning of United Kingdom expenditure. The clause is subject also to Government amendment No. 26. There is a case for explaining the Government’s rationale for their approach towards United Kingdom expenditure for the purposes of the new relief. The provision of relief only on expenditure in the UK marks a significant shift in how the Government’s support to the industry is targeted and delivered. Under the previous regime, when a film was certified as British, relief was given on the entire production budget including costs that were incurred by filming overseas. United Kingdom film tax relief was unique in that respect.
When the previous reliefs were withdrawn, every other country and jurisdiction that gave support to film making through the tax system did so on the basis of domestic rather than worldwide expenditure. Not only was that an anomaly, it was an inefficient way in which to deliver the Government’s objectives for supporting the British film industry. Because tax relief was given, even when the film production took place overseas, it failed to provide an effective incentive for film makers to use the skills, infrastructure and facilities of the United Kingdom. That was directly contrary to the objective of helping to maintain a critical mass of film-making infrastructure and talent within the UK. It is for that reason that the new relief is provided exclusively on film making in the UK.
The aim of clause 35 is to provide the definition of UK expenditure for the purposes of the new relief. However, representatives of the film industry have pointed out that the opening subsection of the clause might be open to misinterpretation and be problematic to operate in practice. The clause, as drafted, makesa distinction between a supply of services, which is treated as United Kingdom expenditure when it is performed in the UK, and a supply of goods, whichis treated as United Kingdom expenditure when it is supplied in the UK. In other words, to determine whether an item of expenditure counts as UK expenditure for the purposes of the clause, a film production company must first establish whether it was incurred in relation to a supply of goods or a supply of services. In some cases, that might not prove to be straightforward. For example, if a film production company hires costumes and props from a specialist supplier, which are then destroyed completely in the course of film making, the question arises whether there was a supply of goods or a supply of services. There are many other such examples. The industry has made a fair point. The lack of clarity was not intended. The clause could create uncertainty unless amended. We have therefore considered how to do so in order to solve that potential difficulty.
Amendment No. 26 will entirely remove the distinction in clause 35 by replacing the rule with one that is simpler and easier to apply. Under our proposed approach, expenditure on goods and services will be judged based on whether they are used or consumed in the United Kingdom. If they are, the expenditure will be treated as UK expenditure under the rules set out in the clauses. Conversely, if they are used or consumed outside the UK, they will not count as UK expenditure. As we discussed on Tuesday, they will still count as a cost for the purposes of normal tax relief, but they will not qualify for the enhanced tax relief detailed in the clauses.

Philip Dunne: I rise on a point of clarification about whether a specific type of service will be covered by the clause. I think that I know the answer, but I was seeking an opportunity to raise the issue during this part of the debate, and this is the right place.
Next month, the filming of “Atonement”, based on the book by Ian McEwan, will commence in my constituency. A number of my constituents will benefit from supplying their own properties as rental accommodation to actors, actresses and production staff. Will the Economic Secretary clarify that that supply of service will be covered under the Government’s new definition and that relief will be available to the production company? I add that if he would like to visit my constituency during the filming, he might enjoy meeting Keira Knightley, as I hope to. Unfortunately, I shall not be able to benefit from the provisions, although it did occur to me. [Interruption.] The hon. Member for Tooting (Mr. Khan) asks whether I will need to declare a personal interest in that respect, and I assure him that I will not, despite my attempts to persuade my wife that we should move out.

Edward Balls: As a novice to such proceedings, I found that to be one of the longest, most eloquent and most attractive declarations of an interest that I have ever come across. I congratulate the hon. Gentleman on having his constituency chosen as the site for the making of that film. I am a great fan of Ian McEwan’s books, and hope that the film does justice to a good read. I should love to visit the hon. Gentleman’s constituency. Maybe we could go to the Long Mynd and have a walk on the Stiperstones. As a fan of the novels of Malcolm Saville, I probably have some knowledge of the area.
I shall reassure the hon. Gentleman and ensure that my earlier remarks do not worry his constituents. I referred to the reason for needing to resolve the ambiguity, using the example of a supplier of a specialist good whose good was completely destroyed in the course of film-making, although I hope that such an unfortunate event will not befall any of his constituents who are allowing their houses to be used. Those houses will be used but not consumed during the making of a British film in Britain. I cannot comment on the details of that situation, but using a house to make a film in Britain is exactly the kind of expenditure that will now clearly come under the definition in Government amendment No. 26. I think that I can give him that reassurance.
The hon. Member for Dundee, East (Stewart Hosie) asked whether the fee for writing the script for a British film would be treated as UK expenditure even when the screenwriter in question was based in Hollywood. We have deliberately adopted an approach to UK expenditure that reflects the international nature of contemporary film-making. We recognise that a film production company will use skills and people from many countries as well as the UK. It is essential that we do so to ensure that international films are made in Britain and qualify for enhanced relief.
Our approach means in practice that UK expenditure will cover all goods and services used in the UK irrespective of nationality. That will include, to take the hon. Gentleman’s example, the cost of a script written by a Hollywood screenwriter and used to make a British film in the UK. I am sure that Committee members, as well as the film industry and Hollywood, will welcome the measures. I commend amendment No. 26 to the Committee.
Opposition amendment No. 35 covers the same ground as the Government amendment and is, I assume, motivated by some of the same concerns that we picked up during our consultation. It takes a different approach by making explicit the way that a film production company incurs expenditure on renting equipment. Such expenditure will be treated as UK expenditure where the equipment being rented is used in the United Kingdom. I fully sympathise with the desire to clarify that treatment, but Government amendment No. 26 provides a better way of doing so that clears up all the ambiguities that might arise. Unless the hon. Member for Chipping Barnet wants me to go into more detail, I urge her to ask leave to withdraw her amendment and accept that amendment No. 26 does the job for her.
Opposition amendment No. 33 would, if adopted, allow the Treasury by regulations to amend the definition of a film production company. I think that we all appreciate the Opposition’s generous assistance in seeking to provide us with amending powers that we have not asked for, but on this occasion we will decline. We do not see the need to amend the definition of a film production company at this stage. I referred earlier to powers that we will take later on to amend some of the definitions, but, as we have heard in the debate over the past hours, the definition of “film production company” is a cornerstone of this chapter; it drives the whole new, modern approach to supporting the British film industry. If we were to revise that definition, we would be revising the intent of the legislation. It would be appropriate at that point to come back to the Finance Bill, rather than simply have a power generously offered by the Opposition, which we decline. I urge the Committee to reject the amendment.

Theresa Villiers: Just reflecting briefly on the debate on this group of amendments, we had a lively discussion on the border line between development and pre-production costs. I felt that the Economic Secretary was bravely trying to give an answer to the various questions raised on this side of the room about which services and activities fell on the development side and which fell on the pre-production side, but he was in some difficulty. That is no reflection on him, but on the practical difficulty of distinguishing between those two things. I continue to be concerned about the exclusion of development from the scope of core expenditure, because of the uncertainty of that border line and for the reasons that I illustrated in my speech.
I welcome what the Economic Secretary has said about a flexible interpretation of what is meant by “is responsible” for the activities contained in the clause. I welcome his comments on Tuesday that an absolutist approach will not be adopted and I acknowledge that the absence of the word “all” in the clause is relevant and helpful. I welcome his reassurance that this is not a blanket exclusion of subcontracting and that the film production company can engage with other people to undertake certain activities without danger of losing its status. However, I continue to be worried about the requirement that a film production company is responsible for pre-production, because of the possibility that it may be set up after pre-production has been completed, as I outlined in my speech. I feel that the flexible interpretation that the Economic Secretary would adopt does not deal with the problems in relation to direct negotiation and directly contracting. The terms of the statute explicitly require that direct relationship, so that precludes any possibility of subcontracting.
I welcome the Economic Secretary’s positive assurances that co-productions will not be affected by the ban on the use of partnerships in this context. There may still be some problem with drafting, and I hope that we do not, as he indicated at one point in his speech, end up having to clarify this matter in the courts, because that costs a great deal of money and is undesirable. If there were any way that further reassurance could be given by guidelines as to how the term “partnerships” is used in that context, that would be welcome. I also welcome his indication that hedoes not anticipate a problem with the European Commission in getting the rules cleared. I urge him to ensure that a final decision is taken on that so that the uncertainty is removed as soon as possible.
The Economic Secretary referred to the difficulties that would occur under amendment No. 47 if there were a dual regime for different companies. I take his point that it would make the system more complicated and it might be better to tackle the matter by reforming the novel way of computing profits and losses under schedule 4. That has led to concern about its impact on television production companies and if we amended that for all production companies, whether or not they qualified for the tax relief, we would not be left with a dual regime.
In conclusion, I shall not press the lead amendment to a Division, but I shall be grateful if the Committee is prepared to vote on amendment No. 31. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 31, in clause 32, page 29, line 18 [Vol I], leave out ‘pre-production'.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 15.

Question accordingly negatived.

Clause 32 ordered to stand part of the Bill.

Clause 33

Meaning of “film-making activities” etc.

Question proposed, That the clause stand part ofthe Bill.

Theresa Villiers: I want to speak briefly to the clause, which covers the meaning of film-making activities, and to emphasise a point that arose during discussions. The clause refers to
“development, pre-production, principal photography and post production”
but there is no statutory definition of those terms. The Treasury’s frequently asked questions document says only that they are
“familiar terms which are well understood within the film industry and take their normal meaning for the purposes of the legislation.”
As we have heard, however, the Minister himself had some difficulty in defining those terms on Tuesday, and it would be exceptionally useful if guidance on the new rules were issued as soon as possible. The indication is that the guidance will not be available until October, which leaves a considerable period of uncertainty. In that respect, I quote Liz Brion of Grant Thorton, who has considerable expertise. She says that if the legislation is
“not entirely clear, then many film productions may well be postponed until publication of the guidance notes, which will obviously have a knock-on effect on levels of film production activity in the UK for much of the rest of the year.”
I hope that the Government will consider bringing forward the publication of guidance.

Edward Balls: I can give the hon. Lady the assurance that she asks for. We will be able to produce detailed guidance on the matter by the end of the summer. On the basis of our consultations with the industry, we do not believe that that will cause undue difficulty.

Question put and agreed to.

Clause 33 ordered to stand part of the Bill.

Clause 34 ordered to stand part of the Bill.

Clause 35

Meaning of “uk expenditure”

Amendment made: No. 26, in clause 35, page 30, line 36 [Vol I], leave out from beginning to end of line 37 and insert—
‘goods or services that are used or consumed in the United Kingdom’.

Clause 35, as amended, ordered to stand part ofthe Bill.

Clause 36

Meaning of “qualifying co-production” and “co-producer”

Question proposed, That the clause stand part ofthe Bill.

Theresa Villiers: I should like to emphasise that the clause concerns qualifying co-production companies. As we have heard, providing an attractive framework for co-production is vital if we are going to encourage an indigenous British film industry. There is a dual purpose to the film tax break: to encourage the big US producers to make films here, and to ensure that home-grown talent can also make films. They are dependent on co-productions to raise the money to get a project off the ground, so I encourage the Government to make absolutely certain that theirnew framework provides the right conditions for co-productions to flourish.
Such co-productions are often dependent on the Government’s successful negotiation of co-production treaties with countries throughout the world. I urge the Government to press ahead with negotiations of further treaties with film-making destinations such as South Africa, and other countries with increasingly vibrant economies that could provide valuable co-production partners for the British film industry.

Edward Balls: I can give the hon. Lady the assurances that she asks for. The purpose of the clause is to enable a film made under international co-production agreement to be treated in the same way as a British film—with the enhanced relief. We discussed earlier how it will be made to work. As for international treaties, we have them with many important film-making centres throughout the world, but we will do what we can to ensure that more countries and film-making centres are brought within the scope of those international agreements.

Question put and agreed to.

Clause 36 ordered to stand part of the Bill.

Clause 37

Taxation of activities of film production company

Question proposed, That the clause stand part ofthe Bill.

John Hemming: I have a tendency to blink when I am in the Whips Office and find myself on a new Committee. Reading these papers, I must declare a sort of interest, inasmuch as I am in the intellectual property business, but not the film business itself. In the intellectual property business, one spends the money at the start and receives the income generally at the end. In my reading of schedule 4, to which the clause relates, we appear to bring forward the tax date for income. That confuses me. It may be that I have got it all wrong, but as far as I can see on that reading, I should not want to be deemed a film production company, because I would pay tax earlier. I thought that the idea was not to.

Edward Balls: The clause introduces the schedule that we will debate shortly, which sets out the details of the application of the tax treatment of film production companies. The hon. Member for Birmingham, Yardley (John Hemming) both gets to the heart of the point and misses it. He is absolutely right that we are changing the future taxation treatment of films, and we are doing so precisely, as he says, so that the tax treatment of a film production company applies over the course of the making of a film rather than on completion. As we discussed at length on Tuesday, we are doing that because that is in line with the way in which films and TV productions are made—film companies get the income early to pay for the making of the film. We are bringing the tax treatment into line with how films are made and accounted for, so that we can then offer enhanced tax relief over the lifetime of the film. The reason why film production companies will want this is partly because it is in line with how they work in any case, and partly because they will then get a fairly substantial enhanced tax support for doing so. I hope that I have reassured the hon. Gentleman, and that he understands our point.

Question put and agreed to.

Clause 37 ordered to stand part of the Bill.

Schedule 4

Taxation of activities of film production company

Theresa Villiers: I beg to move amendment No. 40, in page 165 [Vol I], leave out lines 15 to 17.

Joe Benton: With this it will be convenient to discuss the following amendments: No. 42, in page 165, line 26 [Vol I], at end insert—
‘(1A) Where a company incurs expenditure on the development of a film that is abandoned before pre-production and subsequently begins to carry on a trade as a film production company in relation to another film, the expenditure may be treated as expenditure of the trade of the second film and as if incurred immediately after the company began to carry it on. Provided that the same expenditure is not to be given more than once.'.
No. 53, in page 166, line 19 [Vol I], leave out paragraphs 7, 8 and 9 and insert—
‘7 For the purposes of this Schedule profits and losses are calculated in accordance with generally-accepted United Kingdom accounting principles.'.
No. 55, in page 167, line 4 [Vol I], at end insert
‘; and accordingly—
(a) where, within six years of the end of the first period of account, it becomes clear that the original estimates were incorrect, the film production company can elect in writing to amend the original tax computations to reflect the correct position;
(b) income taxed under the provisions of paragraph 7 of this Schedule shall not be taken into account for tax purposes in a subsequent period of account.'.
No. 41, in page 167 [Vol I], leave out lines 6 to 17.

Theresa Villiers: I would like to make a couple of preliminary points on schedule 4 and the new framework that it introduces. I welcome the fact that the Revenue said in the Budget that film tax returns would be channelled towards a limited number of tax offices, because this is clearly a specialist and technical area and it would be asking a lot of the average tax office to ask it to deal with that. The Government have made the right decision; if film companies get such specialist offices, that will lead to their tax returns being handled more efficiently.
I wish to raise another matter in this context that it is difficult to fit into a discussion of any particular part of the Bill. It would be useful if the Economic Secretary could say something about the transfer pricing issue that has arisen in relation to the film industry. As we have heard, in many cases films will be made by special purpose vehicles, and the practice in respect of SPVs will be to sell the film back to its parent company on completion. I am told that if the Revenue insists that the price that has to be paid for this to count as an arm’s-length sale transaction to the parent is any more than cost minus tax credit, that could pose problems in terms of film financing. Therefore, I shall be grateful for any guidance that the Economic Secretary can give on that.
Amendment No. 40 would delete paragraph 2 of schedule 4, which requires each film to be treated as a separate schedule D class 1 trade. We have examined the issues involved as they specifically apply to TV companies, but I would like to address them in the broader context of all companies that will be covered by the new regime, including those that can get the tax break. This is designed to deal with the significantly increased compliance burden of requiring each film to be treated as a separate trade. The procedure would not be hugely burdensome for the standard model, where a single film is made by a single company—a single SPV—and where compiling a single set of accounts for one film is the logical approach. However, the inclusion of pre-production in the definition in clause 32 means that there will be problems with that model.
Also, in many cases an SPV structure is not used, particularly where companies are in the film business for the long term. The Government have been encouraging companies that produce film after film. In their consultation document, they specifically talk about the desirability of a slate approach being taken by film companies and encouraging them to producea succession of films. In that case, there may be a considerable increase in the compliance burden. KPMG has helpfully circulated a briefing to all hon. Members, which states that some of its clients estimate that they might have to keep separate tax records for up to 600 films, whether or not they qualify for tax breaks. 
The Chartered Institute of Taxation has stated that the new regime could give rise to considerable expenditure-tracking headaches. That arises because a company producing a succession of films or a number at the same time, will inevitably incur expenditure that is difficult to allocate between the films. It would be complex to allocate that expenditure sensibly between the different projects. Furthermore, some expenses that are currently deductible will cease to be so for no obvious reason. The amendment would restore the existing position in which the overall results of the film production company are taken as the single trade for tax purposes, rather than require it to account separately for tax purposes for each film.
I come now to amendment No. 42. Will the Committee consider the treatment of expenditure on a film that does not go into production? That expenditure cannot qualify for the enhanced relief, because the film is not made. However, with the repeal of the existing rules on deduction under section 41 of the Finance (No. 2) Act 1992, that would leave companies without any statute to rely on to allow them to make a deduction along ordinary tax law principles. Can the Minister confirm that such expenses will be treated as an ordinary trading expense, so that even though they do not receive the enhanced deduction, they can be deducted in the normal way?
The Chartered Institute of Taxation considers that the Bill leaves those costs in limbo. Amendment No. 42 suggests another way to solve the matter. It would enable the expenditure on a film that has been abandoned to be carried over to the next film project carried out by a film production company. I emphasise that costs for films that do not get made should be considered a legitimate expense. Those films are encouraging creative talent in the film industry. It is inevitable that, if we are to have a flourishing industry that encourages innovation and the development of projects, a considerable number of those projects will never get off the ground. Film companies should not be deterred from embarking on the expenditure necessary to get films off the ground.
Paragraphs 6 to 9 of the schedule introduce the complicated and controversial new way of calculating profits and losses in the film industry, to which the Committee’s attention has already been drawn. Amendment No. 53 proposes to delete those paragraphs and substitute them with the provision:
“For the purposes of this Schedule profits and losses are calculated in accordance with generally-accepted United Kingdom accounting principles.”
Instead of the new regime applying, we will have accounting required according to generally accepted practices. The amendment disapplies the controversial new regime and leaves the film companies to account for their profits according to ordinary accounting principles. If the paragraphs are not deleted, the new tax framework could cause significant practical problems for some companies.
Paragraph 7 requires the entire estimated income from the film—regardless of how far in the future that income may arise—to be taxed in proportion to how the production costs are incurred. Once post-production is complete, a company will be taxed on all future estimated income, whether or not it has been earned by that stage. The requirement for estimated income could be very problematic, both for independent film makers and large production companies, mainly because it is almost impossible to predict the success of a film. The proposed new rules will mean basically that companies will be paying tax, or receiving less by way of tax credit, on income that they never received. They could also mean that many companies will pay tax well ahead of receiving the relevant income. It may be that the experts who have written to Committee members are wrong in their interpretation of the provision, but I should like the Economic Secretary’s reassurance that the schedule will not have the effect that I have described, because it would be very damaging.
The impact is particularly harsh when a company not only produces a film but then exploits it through licensing. Examples of such licensing are in the DVD and TV markets, in soundtrack sales, in character merchandising, which is particularly relevant to children’s films, and in computer games, which are enormously important and provide a long-term income flow to film makers. Paragraph 6 of schedule 4 contains a wide definition of income for the purposes of the new regime, and takes account of income from all such licensing projects. That income can be unpredictable—I am sure that Members can think of many examples of films that were expected to generate substantial revenues but flopped at the box office and were never heard of again, whereas some films have limited initial success and are very small-scale, but begin to generate significant revenues some years down the line. That is particularly true of films that acquire cult status.
I quoted the accountancy firm of Malde and Co. in Tuesday’s sitting. They said that trying to calculate this income
“is like asking someone ‘how long is a piece of string’”.
I should be interested to hear from the Minister what type of supporting material would be needed to support an estimate of future income. Are film production companies required to rely on critics’ comments? Are sales agents’ predictions to be used? They could certainly produce some over-optimistic estimates.
Paragraph 8 refers to compiling estimates
“on a fair and reasonable basis, taking into consideration all relevant circumstances.”
That is an extremely broad approach, and it seems to leave the way open for serious disputes between film production companies and the Revenue as to what constitutes “fair and reasonable.” It could lead to uncertainty over the level of a tax break and the date when it might be paid.
To conclude, I quote the Chartered Institute of Taxation. Speaking of schedule 4, it said that it firmly believed
“that the new provisions will result in excessive taxation and move us further away from the tax follows accounts principle.”
I hope that the Government will either reconsider the structure, or at least reassure us that it will not work in the way that is anticipated by the experts who have sent representations to Committee members.
If, as I expect, the Government are reluctant to delete paragraphs 7 to 9, I hope that they will consider the alternative proposal suggested by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) in the form of amendment No. 55. The amendment would insert, at the end of paragraph 8, a provision allowing estimates to be revised subsequently if they prove incorrect. I hope that that modest change will be considered. If not, will the Economic Secretary indicate that the Government will find a way to ensure that estimates can be revised in those circumstances? If the Government are not prepared to accept amendment No. 55, I hope that a non-statutory procedure will be found, because it seems unfair to require companies to abide by estimates that subsequently prove to have been over-optimistic.
Amendment No. 41 would delete paragraph 9, and to that extent my comments on the deletion of paragraphs 7 to 9 embrace it. However, it was tabled individually for a specific reason—to highlight a further problem with paragraph 9, separate from the accounting difficulties. Paragraph 9 introduces a new concept of when film expenditure is incurred. Itsays that
“costs are incurred when they are represented in the state of completion of the work in progress.”
I am informed that that definition could produce difficulties in respect of film exploitation costs, which a company may incur at the same time as ongoing production. It seems to add an unnecessary layer of complexity for no apparent reason. Normally one would expect a cost to be incurred when there is an unconditional obligation to pay for it. Perhaps with interpretation we will find that the new rules operate similarly to the old ones, but if they differ from the current rules and ordinary accounting principles, that will add to the complexity of the tax regime faced by film companies. Can the Minister explain why it is proposed to depart from a well-understood definition of whether cost is incurred for tax purposes?

Rob Marris: I should like clarification. Although I am not an accountant but a lawyer by background, the hon. Lady’s last remarks seemed to contradict her amendment No. 53, which calls for profit and lossesto be
“calculated in accordance with generally-accepted United Kingdom accounting principles.”
I thought that valuing and costing work in progress was a standard and generally accepted accounting principle. She seems to be saying that valuing work in progress, which is a standard accounting practice, could cause a problem, but surely that contradicts her amendment.

Theresa Villiers: My amendment would remove the new regime and leave in place the existing rules, which would operate in accordance with standard accounting practice. On that, I conclude my remarks and look forward to the Committee’s comments.

David Gauke: I ask for clarification, Mr. Benton. May I speak to amendment No. 55?

Joe Benton: Yes.

David Gauke: I shall add to the comments of my hon. Friend the Member for Chipping Barnet on paragraphs 7 to 9 to schedule 4. Paragraph 7 will require a film’s entire estimated income to be taxed in proportion to how production costs are incurred. Most of the experts who provided us with representations took that to mean that once post-production is complete, a company will be taxed on all future estimated income. I say “most of the experts”, but it is fair to say that KMPG presumed that the method of calculation would apply only where a film is in production. That was a presumption, however, and even KPMG acknowledged some ambiguity in the text. Clarification on the matter is important.
Amendment No. 55, which was tabled in my name, was drafted on the basis that the interpretation of most of the experts is correct. If so, as my hon. Friend said, there is no mechanism in the Bill for reducing the estimated income if projections prove optimistic. Given the nature of the film business, it is difficult to make accurate projections on such matters. We have a difficulty with the fact that a film might be taxed heavily but might not receive anything like the projected income a few years down the line.
The British Screen Advisory Council pointed out that that income is not discounted for time in any way. My amendment would merely provide a mechanism to deal with that problem. As my hon. Friend said, there might be a non-statutory way to do so, but I should be grateful for the Economic Secretary’s views on whether he acknowledges the problem and on how he would seek to address it if not by accepting amendmentsNos. 55 or 53.
The second point that my amendment raises was mentioned by KPMG, which stated that nothing in the Bill would allow film production companies preparing tax computations after the end of production to strip out the estimated income already taxed. That creates a danger of double taxation. Clearly that would be unfair, and my amendment seeks to address the problem. I should be grateful for the Economic Secretary’s views on whether that is an issue, how best to address it and whether amendment No. 55 would do so successfully.

Edward Balls: We debated earlier the principles and purpose behind the new reliefs, and the schedule and the amendment address in detail how the reliefs will work in practice and how we can make a sensible and robust regime work properly. I can provide reassurance and clarification in a number of ways for the hon. Gentleman. As we discussed on clause 31 on Tuesday, however, the hon. Member for Chipping Barnet has proposed amendments that, in some cases, strain the boundaries and risk taking us back towards some of the problems even though she agrees with the new legislation’s fundamental purposes of tackling tax avoidance.
Amendment No. 40 is at the heart of the new regime and the view that it is necessary for each film to be treated as a separate trade in order to deal with the problems of the past and to ensure that the tax avoidance industry cannot get its hands on these new reliefs. The proposal would not impose an unnecessary regulatory burden and does not run contrary to what has been explained to us as the normal industry practice. Film makers are interested in keeping to budget and making a profit. It is normal practice for them to consider costs and income on a film-by-film basis. How else would they know whether a film was going to be profitable?
It is clear that each film is a project, and is handled and accounted for as such. The requirement to treat each film as a separate trade acknowledges that, but also recognises that the treatment in schedule 4—and, more particularly, in schedule 5—offers special and valuable opportunities. However, we need to draw a line round each film to ensure that the advantages of the reliefs apply to the making of British films and do not leak out more widely.
Like the hon. Lady, I have studied the submission from KPMG but, in our view and on the basis of our consultations, KPMG’s fears about compliance burdens are not broadly shared in the industry. What we are doing is in line with how the industry normally accounts for films already.
Amendment No. 42 addresses cases where development expenditure needs to be passed from an abortive film to an active film in order for it to be recognised for tax purposes. Our view is that amendment No. 42 is unnecessary. To return to some of the issues that I set out earlier, development expenditure goes on deciding whether to make a film, not on making it. If the idea for a film is abandoned, what has been abandoned is the idea, not the film. The idea becomes a film only when the film starts to be made, and the special tax treatment applies to the making of the film, as we discussed earlier.
If production has started, the value of the development is brought into the trade of producingthe film. The film production company buys the development work to make the film—it cannot be made without that work—or there is a transfer of costs within the company to recognise them. That is what paragraph 4 to the schedule is about. If the film is subsequently abandoned, those development costs are recognised.
Amendment No. 42 suggests that the expenditure on abandoned and fruitless ideas needs to be passed on to the film production trade, in order for it to be relieved, but that is not so. Just because a film production trade is ring-fenced does not preclude other expenditure in the company from being handled under normal rules for normal tax purposes. I can therefore give the hon. Lady the assurance that she asked for that those costs will still be treated for normal tax purposes; it is just that they will not be included in the calculation of the enhanced relief.
Amendment No. 53 is more radical and containsat its heart the proposition that tax must follow accountancy. As I said in my introductory remarks, the accounting treatment of film is not without doubt and, where doubt exists, there is the opportunity to rearrange things for tax advantage. The purpose of the Bill is to ensure that such activity does not cause tax avoidance or the leakage of reliefs away from the making of British films. Amendment No. 53 proposes that profits and losses should be
“calculated in accordance with generally-accepted United Kingdom accounting principles.”
However, the problem, as we have discovered in recent years, is that there is no generally accepted treatment.
In the end, treatment falls back on industry practice for reporting profits to company owners. The danger is that the proposal smacks of letting the company’s own accountants decide what the taxable profits should be; but until the introduction of new international accounting standards, that is not where we want to be. The method set out in the Bill is in accordance with where international accounting standards are going, best practice in the industry, and where accountants’ standards are moving to—so much so that some companies will need to make few, if any, computational adjustments to their accounts. Amendment No. 53 would take us backwards and away from international best practice.

John Hemming: The key question about amendment No. 53 is: when does the cash come in as income? One can make an estimate at the start, but it is a finger in the air. That is why amendment No. 55 is a good amendment if amendment No. 7 fails. However, I still have a problem understanding why anyone would want to go through this regime if they are in the business of producing film, because most of the income comes in at the tail; it does not come at the start. Where is the cash coming from to pay all these taxes?

Edward Balls: In our earlier debates, it was explained why we are bringing in a tax treatment to qualify for an enhanced relief. People would want to go through these procedures to get the 20 per cent. tax credit for a smaller film and 16 per cent. for a larger film. That is why companies will go through the regime: to get the advanced tax support.
We are applying this model because of the way in which the industry works. I do not know whether the hon. Gentleman had the chance to read the KPMG briefing to which the hon. Member for Chipping Barnet referred earlier, but it contains a worked example on a different point about whether estimates could be revised. In the example, the film does not get made in the end, but costs are applied through the life of the making of the film, and there are two tranches of income, one of which comes in the first 18 months and one of which is to come on completion. Because the film is not made, a concern about estimates is claimed. In the example, the income to the film production company comes well in advance of the completion of the film precisely so that the costs of making the film can be covered. We are putting in place a tax treatment that allows income and costs to be spread over the lifetime of the film. With the old system, that occurred only on completion.

John Hemming: On that point, I understand that the system is designed to replace a regime that effectively allows the capital that is placed on risk and invested in intellectual property to be treated as a revenue spend right at the start and then for the income to be brought in against that—meaning not only income in terms of investment, but income from which one gets the cash right at the start. There is some merit to that. However, I just do not understand where the cash comes from. Who pays whom for what?

Edward Balls: Without wanting to delay the Committee unnecessarily on this point, I reiterate my earlier comments that this is how film making works. Cost is spread through the lifetime of the making of the film, and income is generally spread through the lifetime of the film to cover those costs. According to our consultation with the industry, that model works for film making in order to qualify for the reliefs. The old model to which the hon. Gentleman referred was both out of date with best practice and subject to substantial abuse. We are trying to implement a model that will avoid some of the problems that we discussed earlier.

Theresa Villiers: What abuse are the Government afraid of? If the system gives rise to abuse, the Opposition will, of course, support the Government’s approach, but we have not heard a convincing explanation about the abuse they are trying to prevent, or how the new structure requiring payment of tax in advance of income is needed to solve a real problem.

Edward Balls: We are in danger of repeating our debate on clause 31. We are trying to move from a regime that was out of line with the accounting practices of film production companies. It too often allowed tax relief to leak out of the making of films; instead, it could be shared by financial vehicles and financiers. We are putting in place a new model, which we debated at length under clauses 31 and 32, to ensure that the tax relief goes to the maker of the film—the film production company. It does so throughout the making of the film.
If, under schedule 4, we were to debate how we operate those rules, it would be a sensible debate. However, as I said at the beginning, although the hon. Lady proclaims to support the new model, she is swayed by those who have proposed amendments and who want to take us back to the old world. We have to make a choice. We can operate the old regime, but she seems to want it for only part of the time—for TV companies and for DVD films. We want to operate the new regime all the time because we want to avoid the old problems; we do not want to be taken back to them. I urge her to reflect again on the good speech that she made at the beginning of the debates on this chapter, and I ask her to help us to implement the measure rather than always harking back to past problems.
I turn to amendment No. 55. The hon. Member for South-West Hertfordshire, in what I think is a probing amendment, is trying to help us clarify how estimates should be used in the calculation of taxable income or allowable losses. The amendment would ensure that estimates can be revisited, and that something included as an estimate in one year would not be included in another year if the income projection proved to be accurate and hence taxed twice. I assure the hon. Gentleman that the way in which schedule 4 treats estimates and revisions will meet his concerns.
Paragraph 8 to schedule 4 makes it clear that estimates are to be made using a proper view of the situation at the accounting date. It is possible that estimates made in relation to that date may not be correct when taking all the information available into account. In such cases, returns can be amended. No special legislation is needed to enable companies to do so, nor is it necessary to set a time limit on when that can be done. In our view, the mechanisms to allow companies to do what the hon. Gentleman asks are already available in the schedule.
We also do not need legislation to reflect changing estimates that arise from new facts or new situations, including new estimates of income or costs. For example, if I have a contract this year to exploit my company’s film that, in the substance of the transaction, will yield me £1 million over five years, I shall make an estimate, which is akin to fair value in accountancy terms—I use that term with some trepidation, as I am neither an accountant nor a lawyer. However, things may change, and the new estimate, based on all the relevant circumstances, including the new ones, may be that I will receive only £900,000.
The formula in paragraph 7 to the schedule says that such a decrease will be recognised in the second year. That is not new; it is the normal sort of accountancy valuation and re-estimate required properly to reflect the substance of the arrangement, which adjusts year on year to track the proper view of income. We do not need specific provisions to allow that sort of change to be made to estimates; it can be done within the ambit of the schedule. I hope that I have reassured the hon. Gentleman.

David Gauke: I am grateful to the Economic Secretary for clarifying the matter. Is KPMG wrong in its assumption that the method of calculation described in the schedule applies only if a film is in production?

Edward Balls: I referred earlier to the KPMG letter and to the hon. Gentleman’s description of the example in appendix 1 of its notes and its concern that there would be a restriction on the ability to re-estimate. In our view, it is not right to be concerned about that. The schedule works through an examination of the difference between this year’s estimated income and last year’s, and that is in line with standard accountancy treatment. We do not need to set a limit at which there can be re-estimation. If the world changes, estimates will be able to be changed and recalculated for tax purposes even after the completion phase. I can give the hon. Gentleman the assurance that he seeks.

David Gauke: I apologise if I am being a little slow. Does that mean that the mechanism contained in the schedule applies not only when a film is in production but subsequently?

Edward Balls: I think that I am right to say that the hon. Gentleman is asking us to give extra clarification to something that is normally and readily understood. That is the intention behind the amendment. In normal accountancy practice, if estimates change, they are reflected in the following year’s treatment. That applies at any point in time—forwards or backwards. We do not need a special clarification or amendment. The hon. Gentleman is right that if the situation arises and the world changes, re-estimation will be allowed at any stage, including after the completion of a film. Does that give him the clarification that he asks for?

David Gauke: I think it does. The statement from KPMG suggests that it presumes that the method of calculation described in the schedule applies only when a film is in production, as the Economic Secretary has fully explained. I question that statement; I do not think that that is right. However, I am grateful for the clarification.

Edward Balls: I am also grateful for this opportunity. The hon. Gentleman thinks that I have clarified the matter and I think that I have. I see nodding, which suggests that I have. As soon as KPMG concludes that I have, we will all be happy.

Rob Marris: May I ask my hon. Friend and his officials to re-examine, although not today, paragraph 7(2)(b)? I understand what he is trying to do, but I am not sure that paragraphs 7(2)(b) and 7(3) achieve what he wants.

Edward Balls: I am disappointed that we did not have a discussion on the explanatory notes on the matter, which will explain it further. I am always grateful to my hon. Friend for his advice, and I will have no problem examining whether we have got the paragraphs absolutely right. I believe that we have, and any ambiguities could be clarified in guidance later. When I read the paragraphs, I understood them. Given that I started from a low base of understanding, I hope that that is of some reassurance.
Amendment No. 41 would remove the rules on when costs should be recognised for tax purposes. A central objective in introducing the new tax relief for British films is to design out opportunities for abuse and the tax avoidance problems that we have had in the past. Chapter 3 contains a number of provisions that have been designed specifically to prevent the new relief from being abused in the same way as previous reliefs, and paragraph 9 to schedule 4 is an example of that intention. In the past, there have been instances in which the actual level of production expenditure was artificially inflated by the inclusion of deferments, fees that are not paid until a film starts to make a profit. They are fairly common in the industry. Paragraph 9(2) states that any payments in advance should be ignored until the work is done, and that
“deferred payments are recognised to the extent that the work is represented in the stage of completion.”
Paragraph 9(3) states that only money subject to an unconditional obligation to pay can be treated as having been incurred, and paragraph 9(4) sets out that if an obligation is linked to income being earned, the costs can be included only when an appropriate amount of income has been brought into account. I hope that that clarifies why our approach is the right one to take. We do not want to go backwards by accepting amendment No. 41.
I must give one more reassurance to the hon. Member for Chipping Barnet—on the issue of transfer pricing. In that area, there is nothing particular or novel about the film industry—

It being twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at fifteen minutes to Two o’clock.